(TAX UPDATE) Company Advance To Director Advances … The Tax Risk Most SMEs Don’t See Coming

Introduction

Many SME directors run their Sdn Bhd like this:

“I take some company money first, later I adjust back.”
“Company got surplus cash, I put under my name in fixed deposit first.”
“Same money only. Company mine anyway.”

On the surface, it feels like normal cash management.

But to LHDN, this is one of the most common patterns that triggers questions because it touches two sensitive areas:

director current account (director owes company), and
interest income from surplus funds.

When LHDN audits, they will not focus only on “whose name is on the bank account”. They will focus on substance and commercial logic:
Whose money is it really? Why is it structured that way? What is the benefit?

What can happen (in simple terms)

Risk 1 : LHDN may treat the company as earning interest even if you did not charge interest

If a director takes an advance from the company and it is interest-free (or very low interest), LHDN may say:

“If this is real business practice, the company should earn some return.
So we will tax the company as if it earned interest.”

This is where many SMEs get surprised during tax computation review. The company did not record interest income, but LHDN may still raise an adjustment.

Risk 2 : If you place company cash into FD under director’s name, LHDN may treat the interest as company income

This is the “smart idea” many people share:

“Company surplus cash. Put under director name FD.
Interest maybe tax-free or lower tax.
Later withdraw and return to company.”

From LHDN’s angle, this raises one big question:

Why is the FD not under the company’s name if it is company money?

FD interest from deposits placed in licensed institutions (e.g. licensed banks / Islamic banks / prescribed institutions) is generally income tax exempt for a resident individual.FD interest is taxable as interest income (normally treated under “other income / interest income”).

If facts suggest the arrangement is mainly to shift the interest away from the company, LHDN may challenge it and treat it as a tax-driven arrangement.

Risk 3 : Your director and your payroll may also be pulled into it

Where the director is also treated as an employee (very common), an interest-free or low-interest loan can create employment benefit exposure. That is why these cases sometimes expand into:

Form EA / payroll reporting, and
director personal tax questions.

Red flags that usually attract LHDN questions

In our experience, issues tend to escalate when you have:

large director balance outstanding for a long time
repeated “in and out” movements monthly with no clear commercial reason
no proper paperwork (no approval, no loan terms, no repayment plan)
FD under director name but money trail shows it came from company
company has surplus cash but reported interest income is unusually low
justification is always: “company is mine anyway”

When these appear, this is no longer a simple accounting adjustment. It becomes a tax risk discussion.

What to do for SME

Option A : If it is company money, keep the FD under company name

This is the simplest approach:

clear ownership
clear tax treatment
easy to explain during audit

Option B: If director advance is unavoidable, treat it like a real loan

Minimum steps that make your file defendable:

board approval for the advance
basic loan terms: amount, purpose, tenure, repayment plan
a reasonable interest policy (or at least documented basis)
proper tracking and repayment discipline
alert payroll team if it may create employment benefit reporting

This is not about making life difficult.
This is about avoiding “unexpected adjustments” during audit.

Technical appendix

A) Company tax: deemed interest income (Section 140B ITA)

Where the advance is interest-free or below arm’s length, Section 140B may deem the company to have interest income taxable under paragraph 4(c).
The computation is formula-based and IRBM examples commonly reference BNM Average Lending Rate (ALR).
Practical trigger: source of funds
- Internal funds: generally in scope
- External funds / third-party borrowings: IRBM guidance notes 140B does not apply where the advance is financed from external funds.

B) FD under director name using company funds: Section 140 anti-avoidance + case authority

Where company funds are placed into FD under directors’ names as part of a tax advantage arrangement, DGIR may invoke Section 140 to counteract the advantage.
Case commonly cited: YEHHSB v KPHDN (2010) MSTC 10,007.

C) Director personal tax: BIK / perquisite exposure

For directors treated as employees, interest-free / low-interest loans may be treated as a taxable employment benefit, requiring review for Form EA / payroll reporting.

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taxKtp KtpFebruary 23, 2026Director account in tax audit

(TAX UPDATE) Company Advance To Director Advances … The Tax Risk Most SMEs Don’t See Coming